A temporary ‘slimming down’ scheme for the milk sector, led by the European Commission, would provide a strong EU-wide response to rebalance the market. With €500 million, the quantity of milk available on the market could be reduced by more than 2 million tonnes, writes Yves Madre.

Yves Madre is the co-founder of Farm Europe, a Brussels-based think tank that aims to stimulate thinking on rural economies in the European Union.

A few days ago, EU Agricultural Ministers commented, once again, not only on the severity of the crisis into which the EU milk sector has plunged, but also on the fact that the measures taken so far have failed to improve the situation of EU dairy producers.

The EU milk sector is in a downward spiral, whereby producers are individually pushed to produce more in order to soften the effect of declining incomes – even though, collectively, this only serves to worsen the on-going slump in prices.

In the absence of suitable action, it is clear that the crisis will have a considerable impact, pushing many farmers out of business, in spite of the fact that the medium- to long-term forecasts for the milk market are promising and offer good prospects for the EU economy.

What, then, may be done to bring the situation back under control and to prepare the sector in the best possible way for the future?

Indeed, the market measures taken last autumn must be upheld and, in some cases, reinforced – especially when it comes to promotion measures. However, in the current context, it is clear that these measures alone will be insufficient. This is even truer given that farms, which have recently made investments – those upon which the EU relies to generate growth and economic dynamism for the future – are endangered.

Injecting, once again, a few million euros as symbolic political support to farmers should also be excluded as a veritable response.

EU institutions must therefore be creative in fine-tuning timely and efficient policy responses, on the basis of the room for manoeuvre at hand.

One tool has, in this regard, been regularly mentioned since 2014: the possibility of introducing a European incentive to reduce production for a limited time frame and for a predefined volume. This option deserves to be considered seriously, without preconceptions and without the fears conjured with the introduction of new tools.

In times of imbalance between production and demand, responsiveness is key to limiting the financial consequences both for the farming community and for the taxpayers.

The European Union could organise a temporary ‘slimming down’ scheme to regain balance on the EU milk market.

This tool would take the form of European calls for tender, with the aim of reducing production and halting the downward spiral. The tenders to reduce production should target farmers and would be on a voluntary basis. Those who decide to participate in the scheme would reduce the quantity of milk delivered, in comparison with the previous winter’s deliveries.

This scheme would be managed by Producer Organisations (POs) and dairy factories, which would respond to EU calls for tender and would manage the reduction plans within their scope of collection.

The scheme would be simple for them: POs and factories would indicate the names of farmers and the related volumes committed which would ensure that public money devoted to the tender goes directly to the milk producers (farmers) This would also ensure that the producers have cut production and have not transferred deliveries to another PO or dairy (incidentally, this risk is rather limited as, in most cases, producers deliver all of their produce to a single operator).

To precipitate a proper shake up effect on the market, the European Commission should announce from the start the overall reduction objective, sending a clear signal to the market, indicating the overall envelope, and putting on the table what it considers to be an attractive range of incentives (probably around 20 cents).

For example, with a financial envelope equivalent to the €500 million package presented by the Commission last autumn, this new scheme, would result in a reduction of 2 to 2.5 million tonnes of the milk available on the EU market.

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Comments

2 responses to “Bringing an end to the never-ending milk crisis”

So, effectively, you are asking the EU to use taxpayer money to enact mechanisms to make milk and milk products more expensive for consumers – and all because milk producers have grown faster than the market. I’m pretty sure that’s not why I pay taxes.

Anthony, I am happy to engage a discussion because I think it’s a very complex issue where the long term interest of consumers/citizens is a bit different than what you explain – even though I fully understand your first feeling you.

Farming sector (and milk sector in particular) is a long term business : you do not decide from one day to another to produce more milk. It’s right: milk producers anticipated a growth of the market which has been disturbed massively by two major factors which were not predictable : the switch of the Chinese economy and the Russian ban (this country being previously one of the main importer of EU food products). Without mentioning that climate conditions have an impact on the overall milk production in the world

Under these conditions policy options for EU decision-makers are the following:
1- let the sector collapse – meaning loosing farmers (often young farmers who just invested in new facilities- facing high charges)
2- spend money to buy surplus (traditional tools that are available within the CAP) or give a bit of money to each producers as the EU did last autumn (500M Eur)
3- reduce the level of production available on the market as proposed.

For the politicians, the question is: what is the long term interest of the consumer/tax payers?

Loosing producers would mean in the future, when market will recover, less milk on the market meaning also higher prices (the challenge nowadays is to attract workers in the farming sector, not the contrary), and for the EU economy less capacity to benefit from the global growth of the milk market after the crisis. In the long term, concentration of offer is not good for competition and prices. It’s not good either to loose the most competitive producers and young producers that represent the future of the sector.

Spending money to buy surplus would perhaps help in the very short term but at one point the storage capacities are costly and limited – the milk will come back on the market. Giving direct support has been done: it’s simply inefficient. 500 millions EUR represents less than 200 euros per farms – it’s nothing when you anyway loose money.

The last option is certainly not perfect – there is no ideal option (in a perfect world offer and demand should always be perfectly balanced) – but it would contribute to rebalance the market in a very effective way, and stop the vicious circle in which producers are: producing more and more to cover charges. It would be efficient use of tax payers money giving fresh air to those producers that will contribute to future agri economy. And in the end it would not make a difference in terms of prices (or only a marginal impact).